Russia Related Risks of Foreign Investors

In contemporary Russia, the concept of "foreign investor" includes both persons financing businesses in Russia by offering loans and credits, and those who directly own such businesses in Russia.

Foreign investments have been always important to the Russian economy development, being one of the key elements maintaining its stability -- which is confirmed by the long-term policy of the Russian Government aimed at creating of the most comfortable conditions for foreign investors.

However, despite all efforts by the government to improve the legislation dealing with the creation of a perfect mechanism of the foreign capital functions in the Russian market and diversification of relevant profit taking methods, the Russian economy had to undergo a durability test called "consequences of the world financial crisis" in 2008. This test, on the one hand, allowed to reveal all its weak points, while on the other hand stressed certain problems compelling the majority of foreign investors to ask themselves a rather straightforward question: "Should I invest in the Russian economy now?"

One of these problems is unpredictability. This unpredictability fits into the so-called "policy risks" category. This term may be used to briefly characterize the main investor risk in the Russian capital market. It is the unpredictability of the economy that, as a rule, reflect specificity of the most of the emerging markets; in Russia, however, those negative phenomena acquire some national features.

It is this risk that provides the greater part of Russian companies' disadvantages when compared with their foreign counterparts. This risk makes the Russian securities market the second echelon market on the global scale – while its assets are rather attractive and promise big profits in the long term, they are accompanied with greater risks of losing the investment. This notion has been convincingly confirmed: having dropped more than twofold in a year, the Russian stock market became one of the plunge leaders of the current crisis.

Acquiring the national peculiarities, unpredictability, for example, in the Russian securities market, creates preconditions for practically insurmountable barriers to those companies wishing to issue securities.

There is a risk of unpredictability in interpretation by the spokespersons of various government agencies of the relevant legislation provisions, leading as a consequence to new barriers for the target company in its economic activities.

There is a risk of careless (though such "carelessness" could hardly be considered innocent) comments by a highly placed official in respect of the target company's outlook (you may wish to recollect the recent "cases" associated with Mechel and Uralkali), which may lead to considerable collapse of the stock prices of such company.

Besides, there is a risk of passing an unpredictable legislation resulting in significant cuts in foreign investment earnings (for example, as a result of tax load increase), or such investments could be simply confiscated by the state as it actually happened right after the revolution, when the young Russian republic refused to recognize the Russian Empire's debt and nationalized foreign companies' property.

Another aspect of this risk is expressed in probability of disputes among large Russian conglomerates over the target company, which may lead to such company crash, even if at first sight it looked like an embodiment of stability.

There is a risk that the progressive management team of a prospering company will be unexpectedly replaced with executives being closer to the government, who have successfully worked in various ministries earlier.

The aforementioned risks force foreign investors to turn first of all to the internationally diversified Russian businesses (i.e. having large assets abroad), which are rather small in numbers and have been tending to get even smaller lately. To counterbalance the influence of negative factors, the Russian government, to promote the interests of foreign investors, must undertake some measures directed at a considerable expansion of such companies' pool, because foreign investments are important for the entire Russian stock market, and for all industries of the economy. Foreign investments provide necessary level of liquidity in the stock market, and, as consequence, raise market value of Russian securities. Foreign investments have the greatest significance for those securities used as investment target by the Russian pension funds, by insurance companies placing their reserves there, and by many mutual investment companies (funds).

It is important that the understanding of the aforementioned risks is shared by all those who have any relation to the formation of the Russian capital market. Decision making and even simple statements should be carried out responsibly. Today, we can assert that overcoming the "unpredictability" risk will promote the return of large foreign investors to the Russian stock market. That, in turn, may lead to real consolidation of the national economy and provide greater living standards to many sections of the population, which could recover internal demand and the Russian economy as a whole.